Why a $100bn plus selloff of Adani companies may have wider implications for India

Foreign investors are sceptical of accounting policies and corporate governance in Asia’s third-largest economy

A painting of Gautam Adani, chairman of Adani Group, in Mumbai. The crisis began last month, with a scathing report by US short seller Hindenburg Research. EPA

A short seller’s battle with India’s Adani Group, which has wiped out more than $100 billion of the conglomerate's market value in just over a week, could have a broader impact on the country’s economy and its attractiveness as an investment destination.

But analysts say the spillover effect has been limited and there is still an opportunity to contain some of the potential wider consequences of the crisis.

“The key is reassuring institutional investors of the quality of our corporate governance and oversight,” says Devi Yesodharan, co-founder of Trendlyne, a stock market analysis platform in India.

“The reaction may be limited to Adani stocks if the market regulator and central bank respond appropriately.”

The crisis began last month, with the release of a scathing report on the Adani Group by US short seller Hindenburg Research. The report accused billionaire Gautam Adani of operating “the largest con in corporate history”.

Hindenburg made allegations of several financial irregularities across the group, which as one of India’s largest conglomerates has interests in sectors from ports to renewable energy.

It claimed Adani had carried out stock manipulation, made improper use of offshore tax havens and raised concerns about the group’s high level of debt.

Mr Adani denies any wrongdoing but investors have been rattled, with losses in Adani Group’s listed companies reaching $108 billion, or halving in market value, since the report was released on January 24.

“The Adani predicament has not just raised questions on the various aspects of the business, such as high debt and corporate governance issues, but it has also tarnished the image of India at a global level,” says Manish Chowdhury, head of research at broker Stoxbox.

“Market participants, especially foreign investors, have started to sound sceptical about India’s story and started asking more questions about accounting policies and various other things.”

The exposure of the overall banking system to the Adani Group — domestic and international — was $23 billion to $24 billion as of March 2022, according to data from Goldman Sachs shared with Bloomberg.

Indian banks have about a one-third share of this, with most of that coming under the public sector banking system.

But the Adani crisis “in the present context does not possess a systemic risk to the banking sector, as most of the domestic loans are secured through stable cash flows”, says Mr Chowdhury.

Adani Group, which is deeply entrenched in sectors that are fundamental to India’s economy, says it has complied with all Indian laws and made all the required regulatory disclosures.

In a 413-page response to the allegations, Adani Group described the Hindenburg report as a “calculated attack on India”, and it has made assurances about its financial position.

The wider-reaching effects of the report, however, became clear when Adani Enterprises, the group’s flagship company, cancelled its $2.5 billion follow-on public offering (FPO) last week, despite having successfully attracted investors amid the crisis.

Mr Adani, in a statement announcing the surprise decision, said it would not be “morally correct” to go ahead with the issue, given the circumstances.

“I think the Adani group companies will find it more difficult to raise funds and debt at previous levels after the failed FPO,” says Ms Yesodharan.

“While they are talking about prepaying pledges to restore faith among lenders, there are unresolved questions around the companies’ governance structures that potential lenders will likely want answers to.”

Speaking to reporters on Saturday, India’s Finance Minister Nirmala Sitharaman said she did not see any wider economic impact stemming from Adani’s scrapping of its FPO.

This comes as the opposition in India has been calling for an urgent probe into the group, saying that small investors are at risk and accusing Mr Adani of having unfairly benefited from close ties with Prime Minister Narendra Modi's government.

“Regulators will do their job and they are independent of the government,” said Ms Sitharaman. “It is up to them to do what is appropriate.”

Raghvendra Nath, managing director at Ladderup Wealth Management in Mumbai, says the facts still need to be established and if the “regulator observes any wrongdoing, then it will go against the group”.

He believes the broader market can withstand the crisis, as long as it remains isolated to the Adani Group.

“Markets have a short-term memory and tend to overlook the noise ... surrounding any particular isolated issues,” says Mr Nath.

There have been efforts by India’s market regulator, the Securities and Exchange Board of India (Sebi), and the central bank, the Reserve Bank of India (RBI), to try to calm investors since the plunge in the value of Adani’s listed companies.

“Sebi is committed to ensuring market integrity and to ensuring that the markets continue to have the appropriate structural strength to function in an uninterrupted, transparent and efficient manner,” the market regulator said in a statement on Saturday.

It said it “seeks to maintain orderly and efficient functioning of the market and has put in place a set of well-defined, publicly available surveillance measures to address excessive volatility in specific stocks”.

On Friday, the RBI said “the banking sector remains resilient and stable”.

Global rating agencies have mixed views on the Adani situation and the direct ramifications for the Adani Group.

Fitch Ratings said there was no immediate impact of the crisis on its ratings of the group's entities and its securities.

Moody's, meanwhile, warned that “these adverse developments are likely to reduce the group's ability to raise capital to fund committed capex or refinance maturing debt over the next one to two years”.

Amid the crisis, S&P cut its rating outlook on Adani Ports and Adani Electricity to negative from stable, citing “the risk of a deterioration in the credit profile of [the companies] due to governance risks and funding challenges for the larger Adani Group”.

There are also clear concerns about the broader economic implications for India of the Adani crisis.

But Shilan Shah, deputy chief emerging markets economist at Capital Economics, says “from the macro perspective, there are few signs of broader contagion”.

“Although foreign equity outflows did pick up in the few days after the publication of the Hindenburg report, the move was not especially severe,” he adds.

He points out that foreign investors resumed purchases of local equities after the country's annual budget was announced on Wednesday, which included a 33 per cent increase in capital expenditure for the coming financial year.

As the Adani situation continues to remain in sharp focus and has yet to be resolved, however, “it is too early to sound the all-clear”, Mr Shah warns.

Some business leaders are worried about the possible fallout.

Anand Mahindra, chairman of another of India's biggest conglomerates, the Mahindra Group, took to Twitter to assure investors that the India growth story was still very much intact.

“Global media is speculating whether current challenges in the business sector will trip India’s ambitions to be a global economic force,” he tweeted.

“I’ve lived long enough to see us face earthquakes, droughts, recessions, wars, terror attacks. All I will say is: never, ever bet against India.”

VK Vijayakumar, chief investment strategist at Geojit Financial Services, is also confident that foreign investors will not be discouraged.

“The excessive volatility triggered by the crash in Adani stocks will die down after some time,” he says. “Foreign institutional investors will have to invest in India if they are to benefit from the India growth story.”

But questions are being asked about how, and if, the Adani Group can escape from this situation.

Mr Chowdhury says that while “it looks a long journey to gain back investors’ trust about the group, it is definitely possible considering the 'too big to fail' tag”.

The group will need to do much more to address and convincingly refute the issues that have been raised to emerge from this crisis, analysts say.

“The way to get out of any situation that threatens your reputation is to answer the charges levelled at you,” says Ms Yesodharan. “That is something the Adani Group will have to do more effectively than they have previously.”

But as the matter is very much ongoing, there is still much uncertainty about how things will ultimately play out.

“Sometimes someone pulls a thread and the whole thing unravels,” says Ms Yesodharan. “Other times, nothing happens — the result depends on how well-built the structure is.”